What Is an Ad Exchange?

Ad exchanges connect the dots to help publishers and advertisers reap the benefits of programmatic advertising at the same time

Programmatic ad tech is widely hailed as the future of advertising, but the most important piece of that future is the bridge between publishers and advertisers. Whether you’re selling digital ad space or buying it, connecting with the players on the other side of the equation is critical to your success. 

Ad exchanges bridge that gap, introducing a transparent, reliable, and profitable way forward for everyone involved in the programmatic ecosystem. Here’s everything you need to know about what ad exchanges are, how they work, and the benefits of using an ad exchange for publishers and advertisers alike.

Expand your knowledge of the programmatic ecosystem even further with our comprehensive resource, What Is Programmatic Advertising?

What Is an Ad Exchange?

An ad exchange, or advertising exchange, is a kind of programmatic advertising technology that allows publishers to sell ad space to advertisers through automated processes. Video, mobile, and display ads are the ad formats most commonly bought and sold on ad exchanges.

On the supply side, publishers, ad networks, and the supply-side platforms (SSPs) they often use to make their inventory available can all plug into ad exchanges in order to make their advertising space available to buyers. On the demand side of the equation, advertisers, advertising agencies, and the demand-side platforms (DSPs) they use to consolidate media buying can use ad exchanges to buy ad space and connect with their target audience.

It’s important to understand that although they may sound similar, ad exchanges and ad networks are not the same. Ad networks buy up ad impressions in bulk (from an ad exchange) or aggregate inventory from various publishers, then serve as intermediaries by reselling to advertisers with the promise of cost and time savings. Ad exchanges are more like trading platforms, in that they allow parties to bid for the specific inventory that is most valuable to them using open, transparent methods.

There are also a few different types of ad exchanges; open ad exchanges are unrestricted marketplaces that virtually any buyer or seller can use, while private ad exchanges control who can participate in the marketplace and compete for available inventory. Private ad exchanges are typically run by individual publishers, who invite specific advertisers to participate in their exchanges instead of opening up participation to the public. 

Preferred deals make private ad exchange transactions even more precise and controlled, by offering inventory to a restricted group of advertisers for a fixed price. This gives publishers more control over the advertisers they welcome into their ecosystem, while offering advertisers the benefits of exclusivity and predictable, stable pricing.

Knowing the pros and cons of private and open exchanges is a big part of getting the most out of your ad spend, especially when it comes to advertising on connected television (CTV). The experts at tvScientific can help walk you through your choices so you can make informed decisions. To learn more about why you should consider diversifying your ad spend with CTV, download our free guide. 

How Do Ad Exchanges Work?

For the sake of simplicity, let’s assume that the publisher in question is using a supply-side platform to facilitate the sale of their available ad inventory, and the advertiser is using a demand-side platform to centralize media buying from multiple sources. The ad exchange allows the supply-side and demand-side platforms to communicate with each other so that as soon as a consumer loads a website in their browser or opens a mobile app on their smartphone, the availability of that impression triggers an RTB auction.

Ideally, publishers specify details like audience demographics and geographic location when they make their inventory available through an SSP, and advertisers supply their budget constraints and audience targeting preferences through the DSP. With all that data pre-loaded into the relevant platform, the ad exchange is able to match the most relevant bidder with specific available ad inventory in a matter of milliseconds. The consumer that opened the website or mobile app will see an ad from the advertiser that won the RTB auction.

But in light of increased privacy restrictions mandated by major tech companies like Apple and Google, that best-case (and highly detailed) scenario isn’t always possible. The data available about the specific ad impression or inventory that is up for sale is dependent on both the platform and the end user; consumers now have considerably more options to limit the amount and types of data that advertisers can access. 

Because of those restrictions, many advertisers prioritize setting budget limits per impression. That way, when the data they might otherwise use to qualify an opportunity is not available from the supply-side platform, advertisers can still participate in real-time bidding up to the price that they have predetermined is worth their spend. While setting a highest bid up-front helps advertisers keep their budgets in check and prevents overspending, these data limitations have led to some concerns about ad quality because they make it harder to ensure each user is being served relevant content.

What Are The Benefits of Using an Ad Exchange?

Ad exchanges are designed to help both publishers and advertisers, making it easier for publishers to increase their ad inventory sales and giving advertisers more control over their media buying. With its transparent approach, the technology aims to minimize the risk of ad fraud and reduce wasted ad impressions while serving consumers relevant and helpful ads. Let’s look at some of the most important ways ad exchanges benefit both publishers and advertisers:

Audience Targeting

Advertisers can reach highly specific audiences using the targeting aspects of their DSPs and the complex algorithms that power ad exchanges. In order to display the most relevant ads at exactly the right time, advertisers can target audiences based on geography, behavior, inventory, device data, app data, and more.

On the publisher side, ad exchanges enable a high degree of flexibility and customization. Publishers with insights into how users interact with their websites or apps and data on the best performing ads within their audience can more easily determine exactly where to display ads in order to maximize engagement.

Expanded Reach

Instead of requiring one-to-one relationships between individual publishers and advertisers, ad exchanges empower both sides of the programmatic advertising equation to significantly expand their reach. Ad exchanges give advertisers instant access to a huge pool of impressions and inventory, allowing them to easily buy ad space from a range of suppliers instead of having to negotiate with one publisher at a time. Meanwhile, publishers gain access to a wide range of entertaining, engaging, and informative ad content that keeps things fresh and exciting for their end users. 

Brand Safety

Brand safety is a top priority for both advertisers and publishers, and ad exchanges allow both parties to manage their reputations and ensure audience alignment. Advertisers get increased control over where and when their ads are displayed, which helps reduce overexposure and ensure ad placements in appropriate and brand-safe apps.

Publishers, on the other hand, gain increased control over the ads they display. Ensuring that everything from ad format to the actual ad creative itself is a good fit helps publishers provide a consistent and pleasant experience to end users. If certain advertisers clash with a publisher’s brand values, it’s easy for that publisher to restrict access to their inventory through an ad exchange.

Transparent Pricing

Transparency is often touted as one of the top benefits of ad exchanges. Costs are transparent and predictable for advertisers, thanks to the commonly used cost per mille (CPM) model which allows them to set a fixed price for every 1,000 impressions of their ad. With or without access to detailed user data, advertisers can still control their advertising budget and ensure that they use their spend wisely.

At the same time, ad exchanges ensure that publishers earn the best possible price for their available ad inventory. Publishers can set minimum prices to prevent low-ball offers that would leave them short-changed, and RTB algorithms ensure the highest (and most relevant) bidder wins the auction, translating to more revenue in publishers’ coffers.

The Future of Ad Exchanges

Global programmatic advertising spend is expected to reach $725 billion by 2026. Ad exchanges are poised to contribute to that projected growth over the coming years, and they are likely to become more and more entrenched as they continue to make it easier for advertisers to buy and publishers to sell ad space. But display and mobile ads aren’t the only way for publishers and advertisers to connect across digital ad real estate. 

CTV advertising belongs in every advertiser’s playbook, and tvScientific is here to help search and social marketers make the transition. With accurate attribution models, real-time performance feedback, and precise targeting options, tvScientific’s sophisticated CTV advertising platform ensures the right audience sees your ads at the right time, while returning the valuable data and insights you need to grow your business. Get in touch today to learn more.